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Screw Your Coreage to the Sticking Place

January 31, 2011 1:12 pmJanuary 31, 2011 1:12 pm

Back when I first tried to explain the logic of focusing on core inflation rather than headline inflation, I emphasized the distinction between goods
whose prices fluctuate all the time and those whose prices are revised only occasionally; it’s the latter category that is subject to inflation inertia, and therefore where you have to worry that inflation
or deflation can get baked into the economy, and become hard to undo.

The usual measures of core inflation try to get at this distinction by excluding goods — food and energy — that we know are subject to large short-term price fluctuations. But in theory, we should be dividing
goods up by their typical price behavior, regardless of which sector they belong to. And researchers at the Atlanta and Cleveland Feds have done just that,
creating a measure of “sticky price inflation”.

What I somehow missed until now is that these measures are available on a monthly basis, providing a nice alternative picture of inflation trends
— plus they offer some additional useful stuff that I’ll get to in a minute.

So here’s what the fixed versus flexible price measures of inflation show over the past 5 years:

FRB Atlanta

You can see clearly how erratic the flexible prices are, and why it’s better to base policy on the sticky prices.

As it turns out, the Atlanta Fed also addresses the issue of whether recent disinflation is all about housing prices, by producing a measure of sticky prices ex-shelter; here’s the comparison:

FRB Atlanta

No, it’s not just housing.

By the way, one could argue that the quintessential sticky prices are actually wages. And they tell the same story. Here’s the BLS employment cost index: